Payback Period Calculator

1. Enter the initial investment. This is the upfront cost of the project or asset: equipment purchase, software license, renovation cost, or any capital expenditure.
2. Choose Annual or Monthly cash flows. Most capital budgeting uses annual periods, but monthly works for short-term projects or when your cash flows are tracked monthly.
3. Choose Equal or Variable cash flows. If the project generates the same amount each period (for example, a rental property with a fixed lease), use Equal. If returns vary by year (typical for many business investments), use Variable and enter each period's expected cash flow separately.
4. Enter a discount rate for the discounted payback period calculation. Use your company's cost of capital, hurdle rate, or a benchmark like 8 to 12% for typical business investments. The discounted payback accounts for the time value of money.

Example: a $50,000 equipment purchase generates $12,000 per year in savings. Simple payback is 50,000 / 12,000 = 4.17 years (4 years 2 months). At an 8% discount rate, the discounted payback is approximately 5.2 years because early cash flows are worth less in today's dollars.

Simple Payback Period (equal cash flows):

Payback Period = Initial Investment / Annual Cash Flow
Example: $50,000 / $12,000 = 4.17 years

Simple Payback Period (variable cash flows):

Add cash flows period by period until the cumulative total
equals or exceeds the initial investment.

Year 1: $10,000 → cumulative $10,000
Year 2: $15,000 → cumulative $25,000
Year 3: $18,000 → cumulative $43,000
Year 4: $12,000 → cumulative $55,000 ← recovers $50,000

Payback = 3 years + ($50,000 − $43,000) / $12,000
        = 3 years + 0.583 years
        = 3 years 7 months

Discounted Payback Period:

Present Value of cash flow in period t:
  PV(t) = Cash Flow(t) / (1 + discount rate)^t

Then add discounted cash flows period by period
until cumulative PV equals initial investment.

At 8% discount rate, Year 1's $12,000 is worth:
  $12,000 / (1.08)^1 = $11,111

Year 2's $12,000 is worth:
  $12,000 / (1.08)^2 = $10,288

The discounted payback period is always longer than the simple payback period because present values are smaller than nominal cash flows. If no discount rate is needed (for example, comparing two investments on raw cash terms), the simple payback period is sufficient.